NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of the Business
Synergy
CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly
Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On
April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its
name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”
The
Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands.
Synergy’s strategy is to grow its portfolio both organically and by further acquisition.
Synergy
is the sole owner of six subsidiaries: Neuragen Corp., Breakthrough Products, Inc., NomadChoice Pty Ltd., Synergy CHC Inc., Sneaky
Vaunt Corp., and The Queen Pegasus Corp., and the results have been consolidated in these statements.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“US GAAP”).
All
amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
At December 31, 2017 and 2016 significant estimates included are assumptions about collection of accounts receivable, useful life
of fixed and intangible assets, impairment analysis of goodwill and intangible assets, estimates used in the fair value calculation
of stock based compensation, beneficial conversion feature and derivative liability on warrants using Black-Scholes Model.
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of December
31, 2017, and 2016, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured
by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit
of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December
31, 2017 and 2016, the uninsured balances amounted to $1,557,373 and $2,038,985, respectively.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Intangible
Assets
We
evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except
intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC
on January 22, 2015 and $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC
and CDG Holdings, LLC on June 21, 2017. Intangible assets are amortized on a straight line basis over the useful lives. As of
December 31, 2017, our qualitative analysis of intangible assets with indefinite lives did not indicate any impairment.
Long-lived
Assets
Long-lived
assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived
asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset
is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators
of impairment include significant underperformance relative to historical or projected future operating results, significant changes
in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry
or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability
of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected,
net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically
a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. As of
December 31, 2017, our qualitative analysis of long-lived assets did not indicate any impairment.
During
the year ended December 31, 2016, the Company fully impaired related intangible assets and charged to operations impairment loss
of $193,750.
Goodwill
An
asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition
over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of December 31, 2017,
our qualitative analysis of goodwill did not indicate any impairment. However, as of December 31, 2016, our review of goodwill
related to one of our subsidiaries did indicate that the carrying amount of the asset may not be recoverable. During the year
ended December 31, 2016, the Company fully impaired related goodwill and charged to operations an impairment loss of $1,983,160.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured.
The Company believes that these criteria are satisfied upon shipment from its fulfillment centers. Certain of our distributors
may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that
are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by
them that they have taken transfer or possession of the relevant portion of our finished goods. Freight billed to customers is
presented as revenues, and the related freight costs are presented as cost of goods sold. Cancelled orders are refunded if not
already dispatched, refunds are only paid if stock is damaged in transit, discounts are only offered with specific promotions
and orders will be refilled if lost in transit.
Deferred
Revenue
Deferred
revenue results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition
criteria have not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.
Accounts
receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts. As of both December 31, 2017, and 2016, allowance for doubtful accounts was
$0.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling and marketing expense
in the accompanying consolidated statements of operations.
Research
and Development
Costs
incurred in connection with the development of new products and processing methods are charged to general and administrative expenses
as incurred.
Income
Taxes
The
Company utilizes FASBASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
The
Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
NomadChoice
Pty Ltd, the Company’s wholly-owned subsidiary is subject to income taxes in the jurisdictions in which it operates. Significant
judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during
the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for
anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of
these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in
the period in which such determination is made.
Synergy
CHC Inc. is a wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates. Significant
judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during
the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for
anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of
these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in
the period in which such determination is made.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed
by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares
of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing
the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible
into common stock (using the “treasury stock” method), unless their effect on net income per share is anti-dilutive.
As of December 31, 2017 and 2016, options to purchase 8,666,667 and 6,300,000 shares of common stock, respectively, were outstanding.
As of both December 31, 2017 and 2016, warrants to purchase 1,000,000 shares of common stock were outstanding.
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive
due to the respective exercise prices being greater than the
market price of the Company’s common stock on the dates shown:
|
|
|
December
31, 2017
|
|
|
December
30, 2016
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
8,666,667
|
|
|
|
6,300,000
|
|
|
Warrants
to purchase common stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
9,666,667
|
|
|
|
7,300,000
|
|
Fair
Value Measurements
The
Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with
ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure.
ASC
825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes
three levels of inputs that may be used to measure fair value:
Level
1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level
2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level
3 - Unobservable inputs for the asset or liability.
The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
As
of December 31, 2017, the Company has determined that there were no assets or liabilities measured at fair value.
Inventory
Inventory
consists of raw materials, components and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or net realizable value. Finished goods include the cost of labor to assemble the items.
Stock-Based
Compensation
ASC
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
Foreign
Currency Translation
The
functional currency of one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s
subsidiary maintains its record using local currency (Australian Dollar). All monetary assets and liabilities of foreign subsidiaries
were translated into U.S. Dollars at fiscal year-end exchange rates, non-monetary assets and liabilities of foreign subsidiaries
were translated into U.S. Dollars at transaction day exchange rates.
Income
and expense items related to non-monetary items were translated at exchange rates prevailing during the transaction date and other
incomes and expenses were translated using average exchange rate for the period. The resulting translation adjustments, net of
income taxes, were recorded in statements of operations as remeasurement gain or loss on translation of foreign subsidiary.
The
functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s
foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were
translated into U.S. Dollars at period end exchange rates and stockholders’equity is translated at the historical rates.
Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net
of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s
equity in accordance with ASC 220 – Comprehensive Income.
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the
transaction and included in the results of operations as incurred.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral was not required. Accordingly,
the Company performed credit evaluations of its customers and maintained allowances for possible losses which, when realized,
were within the range of management’s expectations. From time to time, a higher concentration of credit risk existed on
outstanding accounts receivable for a select number of customers due to individual buying patterns.
Warehousing
costs
Warehouse
costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional
costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.
Product
display costs
All
displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs
for display execution and setup and retail services are charged to cost of sales and expensed as incurred.
Warrant
Derivative Liabilities
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional, as described.
A
Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Derivative
Liabilities as of November 12, 2015 and December 31, 2015. As of December 23, 2016 the Warrant Derivative Liability was extinguished
in conjunction with the issuance of shares. This model is subject to the significant assumptions discussed below and requires
the following key inputs with respect to the Company and/or instrument:
|
Input
|
|
November
12, 2015
|
|
|
December
31, 2015
|
|
|
December
23, 2016
|
|
|
Stock Price
|
|
$
|
0.46
|
|
|
$
|
0.69
|
|
|
$
|
0.39
|
|
|
Exercise Price
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
|
Expected Life (in years)
|
|
|
10.0
|
|
|
|
9.75
|
|
|
|
8.92
|
|
|
Stock Volatility
|
|
|
157.56
|
%
|
|
|
152.07
|
|
|
|
143.15
|
%
|
|
Risk-Free Rate
|
|
|
2.32
|
%
|
|
|
2.27
|
|
|
|
2.55
|
%
|
|
Dividend Rate
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
Outstanding Shares
of Common Stock
|
|
|
4,547,243
|
|
|
|
4,547,243
|
|
|
|
4,547,243
|
|
Cost
of Sales
Cost
of sales includes the purchase cost of products sold and all costs associated with getting the products into the retail stores
including buying and transportation costs.
Debt
Issuance Costs
Debt
issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related
loan and are being amortized to interest expense over the term of the related debt facilities.
Shipping
Costs
Shipping
and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and
marketing expenses.
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions
with related parties are recorded at fair value of the goods or services exchanged.
Segment
Reporting
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregated basis.
Recent
Accounting Pronouncements
ASU
2017-13
In
September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606),
Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 15,
2018. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.
ASU
2017-04
In
January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment
test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the
impact of adopting ASU 2017-04 on our consolidated financial statements.
ASU
2017-01
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities
is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This
new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application
to any business development transaction. We are currently evaluating the impact of adopting ASU 2017-04 on our consolidated financial
statements.
ASU
2016-18
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that restricted cash and restricted
cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash
amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for fiscal years beginning after December
15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently
evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements.
ASU
2016-15
In
August 2016, the FASB issued AS 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15
is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements.
ASU
2016-10
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is
a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services.
The
effective date for ASU 2016-10 is the same as the effective date of ASU 2016-08 and ASU 2014-09 as amended by ASU 2015-14,
for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Effective January
1, 2018, the Company will adopt the requirements of Topic 606 using the modified retrospective method. Upon adoption, the
Company will recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance
of retained earnings. Using the modified retrospective method of adoption, the comparative information for periods prior
to 2018 will not be restated and instead will continue to be reported under the accounting standards in effect for those periods.
The
Company anticipates that the adoption of the new standard will not result in a material difference between the recognition of
revenue under Topic 606 and prior accounting standards. For the majority of the Company’s net sales, revenue will continue
to be recognized when products are shipped from our distribution facilities, or when received by the customers, depending upon
the terms of the contract. In addition, to meet the disaggregation disclosure requirements under Topic 606, the Company anticipates
its disclosure of revenue disaggregation will be by major product group, geographic area and major sales channels.
ASU
2016-09
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.
ASU
2016-01
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the
current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. Adoption of this new standard did not have any impact on the Company’s consolidated
financial statements.
ASU
2015-17
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each
tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet.
To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with
any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company
adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial statements, and did not have any effect
on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
ASU
2015-16
In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to
the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required
to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment
to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after
the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally
up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and,
instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard
is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard
did not have any impact on the Company’s consolidated financial statements.
ASU
2015-11
In
July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting
for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that
inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Adoption
of this new standard did not have any impact on the Company’s consolidated financial statements.
ASU
2015-05
In
April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2015-05
provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about
whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05
is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after
December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. Adoption of this new standard did
not have any impact on the Company’s consolidated financial statements.
ASU
2015-07
In
May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent) This guidance eliminates the requirement to categorize investments
within the fair value hierarchy if their fair value is measured using the net asset value (“NAV”) per share practical
expedient in the FASB’s fair value measurement guidance. The new standard is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s
consolidated financial statements
ASU
2015-03
In
April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments
in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet
of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company
reclassified debt issuance cost of $160,950 and $378,852 from other assets to liabilities and netted off with the related loans
in the liabilities as of December 31, 2016 and 2015, respectively.
ASU
2015-02
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is
intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability
corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed
security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate
whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to
two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis
on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party
guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation
conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. Adoption of this new standard did not have any impact on the Company’s consolidated
financial statements.
ASU
2015-01
In
January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This ASU eliminates from U.S. GAAP the
concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. A reporting entity may apply the amendments prospectively. Adoption of this new standard did not have
any impact on the Company’s consolidated financial statements.
ASU
2014-
16
In
November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” ASU 2014-16 addresses whether the
host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not currently
have issued, nor are we investors in, hybrid financial instruments. Adoption of this new standard did not have any impact on the
Company’s financial position, results of operations or cash flows.
ASU
2014-12
In
June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.”
This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period
be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position,
results of operations or cash flows.
ASU
2014-08
In
April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU
2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, as well as amending
the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2014. The adoption of ASU 2014-08 did not have any
effect on our financial position, results of operations or cash flows.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s condensed financial position, results
of operations or cash flows.
Note
3 – Acquisitions
Asset
Purchase Agreement with Factor Nutrition Labs, LLC:
On
January 22, 2015 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”)
with Factor Nutrition Labs, LLC, a Delaware limited liability company (the “Seller”), Vita Partners, LLC, RPR Partners,
LLC, and Thor Associates, Inc. (each a “Principal Owner”). Pursuant to the Purchase Agreement, the Company purchased
all of the assets of the Seller’s line of business and products called FOCUS Factor (the product plus the business related
to the product is collectively referred to as the “Focus Factor Business”) and assumed the accounts payable and contractual
obligations of the Focus Factor Business for an aggregate purchase price of $6.0 million, with $4.5 million paid on the Closing
Date, and $750,000 to be paid on or before January 20, 2016 and an additional $750,000 to be paid on or before January 20, 2017
,
both of which payments were made on a timely basis.
Distribution
Agreement
On
January 22, 2015, the Company and Knight Therapeutics (Barbados) Inc. (“Knight”) entered into a Distribution,
License and Supply Agreement (the “Distribution Agreement”), pursuant to which the Company granted to Knight an exclusive
license to commercialize FOCUSFactor, FOCUSFactor Kids and Synergy Strip and all improvements thereto (together the “Licensed
Products”) and appointed Knight as the exclusive distributor to offer to sell and sell the Licensed Products in Canada,
and, at Knight’s election, one or more of Israel, Russia, and Sub-Saharan Africa. The Distribution Agreement provides that
Knight may sublicense its rights or use sub-distributors under the Distribution Agreement on terms consistent with the terms of
the Distribution Agreement. During the term of the Distribution Agreement, Knight agrees to obtain from the Company all its requirements
for the Licensed Products and the Company agrees to supply the Licensed Products at its adjusted production cost plus a designated
percentage and any applicable taxes.
In
the event of a long term inability by the Company to supply Knight with the Licensed Products, Knight is entitled to require,
among other remedies, the Company to grant a Knight-designated third party a non-exclusive license to use all relevant intellectual
property to manufacture and supply Knight with the Licensed Products for commercialization in the Territory. The term of the Distribution
Agreement runs until 15 years from the date of the first commercial sale of a Licensed Product in Canada, and the Distribution
Agreement will automatically renew for successive 15-year periods unless either party provides the other with written notice of
its intention not to renew (a “Non-Renewal Notice”). The Company agrees that in the event it issues a Non-Renewal
Notice, the Company will pay to Knight a non-renewal fee equal to the net sales of the Licensed Products achieved by Knight in
the Territory during the eight calendar quarters preceding the date of such notice, plus all applicable taxes.
Distribution
Option Agreement
In
connection with the Loan Agreement, the Company entered into a Product Distribution Option Agreement, dated January 22, 2015 (the
“Option Agreement”), pursuant to which the Company granted Knight the exclusive right to negotiate the exclusive distribution
rights of any one or more of the Company’s products, including products from the Focus Factor Business, for the territories
of Canada, Russia, Sub-Saharan Africa and Israel (the “Option”), pursuant to designated parameters. The Option Agreement
is effective upon the date of the Option Agreement, will run until January 31, 2045, and will automatically renew thereafter for
successive five-year periods unless either party provides a notice of termination prior to the Option Agreement’s expiration.
If Knight does not exercise the option then the Company is free to contract for distribution with other parties, but only on terms
no less favorable than those offered by Knight pursuant to the Option Agreement.
On
December 3, 2015, we entered into an Amendment to First Amendment Agreement (the “Second Amendment Agreement”) with
Knight pursuant to which we agreed to grant distribution rights to Knight for Breakthrough’s products. To satisfy this obligation,
on December 3, 2015, we also entered into an Amendment and Confirmation Agreement (the “Confirmation Agreement”) with
Knight, Nomad and Breakthrough to amend the Distribution, License and Supply Agreement dated January 22, 2015 (the “Distribution
Agreement”) between us and Knight to grant to Knight an exclusive license to commercialize any and all Nomad and Breakthrough
products and appoint Knight as the exclusive distributor to offer and sell those products in Canada, Israel, Romania, Russia and
each of the countries within Sub-Saharan Africa, which is the new “Territory” under the Distribution Agreement, as
amended. Pursuant to the Second Amendment Agreement, Nomad will buy all Flat Tummy Tea products within the Territory for direct
to consumer sales exclusively from Knight and/or its affiliates at cost of goods plus 60% of gross sales.
On
December 23, 2016, we entered into a FOCUSFactor Distribution Agreement (Canada) with Knight whereas the Company was appointed
the exclusive Third Party distributor or FOCUSFactor products in Canada. In conjunction with this agreement, we are required to
pay Knight a distribution amount equal to 30% of gross sales on revenue generated from direct sales and 5% of gross sales on revenue
generated from retail sales. This distribution agreement has a minimum amount due of $100,000 Canadian, annually.
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on January 22, 2015. The preliminary allocation of the purchase price to
the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Assets
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,733,167
|
|
|
Inventory
|
|
|
67,113
|
|
|
Intellectual
property
|
|
|
1,000,000
|
|
|
Non-compete provision
|
|
|
50,000
|
|
|
Non-solicitation
provision
|
|
|
50,000
|
|
|
Intangible assets-Customer
relationships
|
|
|
1,941,030
|
|
|
Goodwill
|
|
|
2,071,517
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(971,381
|
)
|
|
Accrued
expenses
|
|
|
(941,446
|
)
|
|
|
|
$
|
6,000,000
|
|
During
the first quarter of 2016, the Company consulted with a valuation professional to assist in determining the fair
value of the identifiable FOCUSfactor intangible assets. As a result of this work, the Company increased the amount allocated
to the FOCUSfactor indefinite-lived brand and patent by $450,000 and reduced the amount recorded to goodwill by an identical amount.
This adjustment had no effect on the income statement for the year ended December 31, 2015. The Company believes that the
restated amount of $1,450,000 properly states the fair value of the FOCUSfactor brand and patent.
The
final allocation of the purchase price to the assets acquired and liabilities assumed based on the independent valuation is as
follows:
|
Assets
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,733,167
|
|
|
Inventory
|
|
|
67,113
|
|
|
Intellectual property
|
|
|
1,450,000
|
|
|
Non-compete provision
|
|
|
50,000
|
|
|
Non-solicitation
provision
|
|
|
50,000
|
|
|
Intangible assets-Customer
relationships
|
|
|
1,941,030
|
|
|
Goodwill
|
|
|
1,621,517
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(971,381
|
)
|
|
Accrued
expenses
|
|
|
(941,446
|
)
|
|
|
|
$
|
6,000,000
|
|
The
Customer relationships, the non-compete and the non-solicitation provisions will be amortized over their estimated useful lives
of 5 years. Intellectual property is not amortized and will be tested for impairment. During each of the years ended December
31, 2017 and 2016, the Company charged to operations amortization expense of $408,206.
The
purchase price allocated to the acquisition of the assets of Factor Nutrition Labs, LLC is made up as follows:
|
|
|
Amount
|
|
|
Cash payment made on January
22, 2015
|
|
$
|
4,500,000
|
|
|
Cash payment made on January 20, 2016
|
|
|
750,000
|
|
|
Cash payment
made on January 20, 2017
|
|
|
750,000
|
|
|
Total
|
|
$
|
6,000,000
|
|
Asset
Purchase Agreement with Knight Therapeutics Inc.:
On
June 26, 2015 (the “Closing Date”), Neuragen Corp., a Delaware corporation (“Neuragen”) and our wholly
owned subsidiary, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Knight Therapeutics Inc.,
a Canadian corporation (“Knight Canada”). Pursuant to the Purchase Agreement, Neuragen purchased the U.S. rights related
to an innovative OTC product that helps relieve pain caused by diabetic nerve damage (the “Purchased Assets”) for
an aggregate purchase price of $1.2 million, with (i) $250,000 paid on the Closing Date, (ii) $250,000 to be paid on or before
June 30, 2016, (iii) $700,000 to be paid in quarterly installments (beginning with the quarter ending September 30, 2015) equal
to the greater of $12,500 or 5% of U.S. net sales, and (iv) 2% of U.S. net sales of Neuragen for 60 months thereafter. The payment
of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”) pursuant
to the Security Agreement, which will be released upon receipt of total payments of $1.2 million (collectively, “Total Consideration”).
The Company has recorded present value of future payments of $282,240 and $290,947 as of December 31, 2017 and 2016, respectively.
The Company has recorded interest expense of $41,292 and $59,358 for the years ended December 31, 2017 and 2016, respectively.
Security
Agreement
On
the Closing Date, Neuragen entered into a Security Agreement with Knight Canada, pursuant to which Neuragen granted a lien and
security interest to Knight Canada in Collateral in connection with the Purchase Agreement.
The
Security Agreement was made to secure the payment of all indebtedness, obligations and liabilities of Neuragen of the Purchase
Agreement, including all expenses and charges, legal or otherwise, suffered or incurred by Knight Canada in collecting or enforcing
such indebtedness of the Purchase Agreement.
The
Security Agreement includes customary events of default, including but not limited to: payment defaults; Neuragen becoming insolvent
or entering into bankruptcy; or if any contemplated security ceases to be a valid and perfected first-priority security interest
that is not remedied within fifteen business days by Neuragen. Upon the occurrence of an event of default and during the continuation
thereof, the principal amount of the outstanding Total Consideration will bear a default interest rate of an additional 10% per
annum.
The
acquisition was treated as an acquisition of assets as the transaction involved the acquisition of a brand and a license agreement.
The allocation of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Assets
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
58,054
|
|
|
Inventory
|
|
|
204,925
|
|
|
Intangible property
|
|
|
100,000
|
|
|
License agreement
|
|
|
606,553
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(51,795
|
)
|
|
Accrued
expenses
|
|
|
(148,520
|
)
|
|
|
|
$
|
769,217
|
|
The
intangible property and license agreement will be amortized over their estimated useful lives of 5 years. During each of the years
ended December 31, 2017 and 2016, the Company charged to operations amortization expense of $141,311.
Contribution
Agreement with Hand MD Corp.:
On
August 18, 2015 (the “Closing Date”), we entered into a Contribution Agreement with Hand MD Corp., a Delaware corporation,
whereby we contributed to Hand MD Corp. 2,142,857 shares of our common stock in exchange for 50% of Hand MD Corp.’s outstanding
capital securities valued at $0.70 per share. Simultaneously, Hand MD, LLC, a California limited liability company, entered into
a Contribution Agreement with Hand MD Corp., the principal owners of Hand MD, LLC, and us whereby Hand MD LLC contributed to Hand
MD Corp. all of its right, title and interest in its intellectual property associated with skincare, nail care and nail polish
products (the “Hand MD Business”) in exchange for the other 50% of Hand MD Corp.’s outstanding capital securities.
In the Contribution Agreement among Hand MD Corp., Hand MD, LLC, the principal owners of Hand MD, LLC and us, Hand MD, LLC and
its principal owners agreed to not compete or solicit customers or employees for five years. As part of the transaction, we also
purchased from Hand MD Corp. all inventory related to the Hand MD Business for approximately $106,000. The Company has recorded
50% of the present value of future royalty payments of $221,222 and $313,752 as of December 31, 2017 and 2016, respectively.
We
also entered into a license agreement with Hand MD Corp. on August 18, 2015, whereby we acquired the exclusive worldwide license
to commercialize Hand MD Corp. skincare products and all improvements thereto. The license runs in perpetuity unless earlier terminated.
We will pay Hand MD Corp. a royalty of 5% of the net sales price of product sold, transferred or otherwise disposed of by us,
as well as 5% of any amount we receive from sublicensees, subject to a minimum royalty of $250,000 in the second year of the license
and $500,000 in the third year of the license, after which the minimum royalty terminates. We are solely responsible for any regulatory
and intellectual property filings, including those necessary to maintain regulatory approvals for the licensed products. Either
we or Hand MD Corp. can terminate the agreement in the event of bankruptcy or insolvency of the other party, or the uncured material
breach of the agreement by the other party. Upon termination we would be entitled to sell any inventory of licensed product in
the normal course of business and consistent with sales of licensed product during the term of the agreement.
The
Contribution Agreements and the License Agreement contain customary representations and warranties and covenants by the respective
parties.
We
also entered into a Consulting Agreement on August 18, 2015, with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant to
which she will provide marketing and sales related services. We will pay Ms. Harshbarger $10,000 a month for one year unless the
Consulting Agreement is terminated earlier by either party. If we terminate the Consulting Agreement without cause, we will be
obligated to pay the remaining term of the Agreement. Ms. Harshbarger agreed not to compete with us in the United States in any
marketing or sales of skincare, nail polish and nail care products during the term of the Consulting Agreement and for 12 months
after its termination. Ms. Harshbarger also agreed not to solicit customers or employees for the same period.
The
acquisition was treated as an acquisition of assets as the transaction involved the acquisition of a brand and a license agreement.
The allocation of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Assets
|
|
|
|
|
|
Intangible
property
|
|
$
|
100,000
|
|
|
License agreement
|
|
|
1,670,675
|
|
|
Liabilities
|
|
|
-
|
|
|
Royalty payable
|
|
|
(258,897
|
)
|
|
Others
|
|
|
(11,778
|
)
|
|
|
|
$
|
1,500,000
|
|
The
intangible property and license agreement will be amortized over their estimated useful lives of 5 years. During each of the years
ended December 31, 2017 and 2016, the Company charged to operations amortization expense of $354,135.
Stock
Purchase Agreement with Breakthrough Products, Inc.:
On
November 12, 2015 (the “UrgentRx Closing Date”), we entered into a Stock Purchase Agreement (the “UrgentRx SPA”)
with Breakthrough Products, Inc., a Delaware corporation (“Breakthrough”), URX ACQUISITION TRUST, a Delaware
statutory trust, (the “Trust”), Jordan Eisenberg, the chief executive officer and a shareholder of Breakthrough (“Eisenberg”),
and the other shareholders of Breakthrough (Eisenberg and such other shareholders collectively referred to as the “UrgentRx
Sellers”) for the purchase of all the issued and outstanding capital stock of Breakthrough for 6,000,000 shares of
our common stock (“UrgentRx Equity Consideration”). Breakthrough is engaged in the business of developing and selling
treatments for headache, heart burn, allergy attack, ache and pain and upset stomach in the form of powders (“UrgentRx”).
In
addition to the UrgentRx Equity Consideration, we agreed to pay a royalty to the Trust, for the benefit of the UrgentRx Sellers,
equal to 5% of gross sales of the UrgentRx following the first $5,000,000 in gross sales by the UrgentRx Products, on a quarterly
basis for a period of seven years from the UrgentRx Closing Date.
Following
the UrgentRx Closing Date, we discovered certain liabilities and obligations of Breakthrough that required an adjustment to the
UrgentRx Equity Consideration and the royalty payments.
On
December 17, 2015, we entered into a Settlement and Release Agreement (the “Settlement Agreement”) with the UrgentRx
Sellers, the Trust, on its own behalf and as the representative of the UrgentRx Sellers, David T. Leyrer, Michael Valentino, Ron
Fugate, and Randall Kaplan (collectively with Leyrer, Valentino, Fugate, the “Former Directors”) to resolve the post-closing
liabilities. Pursuant to the terms of the Settlement Agreement, 3,000,000 shares of the Equity Consideration were returned by
the Trust to us and our obligation to pay royalties to the Trust was reduced from seven years to five years. The Settlement Agreement
further contained mutual releases among us, the UrgentRx Sellers, and the Former Directors, with limited exceptions. Additionally,
we issued a three-year warrant to the Trust with a $5.00 per share exercise price. We may redeem the warrant at a price of $0.001
per share if our common stock is traded on the OTCBB or on a national securities exchange, and the per share closing sale price
of our common stock equals or exceeds the exercise price for a period of 90 consecutive calendar days. In the event of a reorganization
or reclassification of our capital stock, the merger or consolidation of our company into another entity or the sale or transfer
of all or substantially all of our assets, the warrant will terminate if not exercised prior to the date of such event.
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on November 12, 2015. The preliminary allocation of the purchase price to
the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
2,298,619
|
|
|
Accounts receivable
|
|
|
(68,976
|
)
|
|
Inventory
|
|
|
234,709
|
|
|
Prepaid expenses
|
|
|
57,569
|
|
|
Intellectual property
|
|
|
100,000
|
|
|
Non-compete provision
|
|
|
50,000
|
|
|
Goodwill
|
|
|
3,253,160
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(741,822
|
)
|
|
Accrued expenses
|
|
|
(2,202,848
|
)
|
|
|
|
$
|
2,980,411
|
|
The
preliminary purchase price allocated to the acquisition of the assets of UrgentRx is made up as follows:
|
|
|
Amount
|
|
|
Stock
payment
|
|
$
|
2,550,000
|
|
|
Stock
warrants issued
|
|
|
430,411
|
|
|
Total
|
|
$
|
2,980,411
|
|
During
the second quarter of 2016, the Company consulted with a valuation professional to assist in determining the fair
value of the identifiable Breakthrough Products, Inc.’s intangible assets. As a result of this work, the Company increased
the amount allocated to the UrgentRx patent by $150,000, decreased the amount allocated to a Non-Compete agreement by $50,000
and reduced the amount recorded to goodwill by the identical amounts. In addition, it was determined that an incorrect stock price
was used to calculate the purchase price of the transaction. As a result of this determination, the Company decreased Additional
Paid In Capital and Goodwill by $1,170,000. These adjustments had no effect on the income statement for the year ended December
31, 2015. The Company believes that these restated amounts properly state the fair value of the Breakthrough Products, Inc.
transaction.
The
final allocation of the purchase price to the assets acquired and liabilities assumed based on the independent valuation is as
follows:
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
2,298,619
|
|
|
Accounts receivable
|
|
|
(68,976
|
)
|
|
Inventory
|
|
|
234,709
|
|
|
Prepaid expenses
|
|
|
57,569
|
|
|
Intellectual property
|
|
|
250,000
|
|
|
Non-compete provision
|
|
|
-
|
|
|
Goodwill
|
|
|
1,983,160
|
|
|
Liabilities
|
|
|
|
|
|
Accounts Payable
|
|
|
(741,822
|
)
|
|
Accrued Expenses
|
|
|
(2,202,848
|
)
|
|
|
|
$
|
1,810,411
|
|
The
Intellectual property will be amortized over its estimated useful live of 5 years and the non-compete provision will be amortized
over its term of 3 years. During the years ended December 31, 2017 and 2016, the Company charged to operations amortization expense
of $0 and $51,667, respectively.
As
of December 31, 2016 our review of intangible assets and Goodwill related to UrgentRx did indicate that the carrying amount of
these assets may not be recoverable. It was determined that the net balance of $193,750 of intangible assets and $1,983,160 of
Goodwill would be fully impaired and accordingly the Company recorded impairment loss of $2,176,910 during the year ended December
31, 2016.
The
adjusted purchase price allocated to the acquisition of the assets of UrgentRx is made up as follows:
|
|
|
Amount
|
|
|
Stock payment
|
|
$
|
1,380,000
|
|
|
Stock warrants issued
|
|
|
430,411
|
|
|
Total
|
|
$
|
1,810,411
|
|
Stock
Purchase Agreement with TPR Investments Pty Ltd:
On
November 15, 2015 (the “Flat Tummy Tea Closing Date”), we entered into a Stock Purchase Agreement (the “Flat
Tummy Tea SPA”) with TPR Investments Pty Ltd ACN 128 396 654 as trustee for Polmear Family Trust (the “Flat Tummy
Tea Seller”), Timothy Polmear and Rebecca Polmear and NomadChoice Pty Limited ACN 160 729 939 trading as Flat Tummy Tea,
an Australian proprietary limited company (“NomadChoice”) for the purchase of all the issued and outstanding capital
stock of NomadChoice for $4,000,000 (AUD) in cash consideration (the “Cash Consideration”) and 3,571,428 shares of
our common stock (“Flat Tummy Tea Equity Consideration”).
In
addition to the Cash Consideration and the Flat Tummy Tea Equity Consideration, we have also agreed to pay the Flat Tummy Tea
Seller certain earn-out payments of up to $3,500,000 (AUD) in aggregate upon certain EBITDA thresholds are met as of June 30,
2016, as described in the Flat Tummy Tea SPA. This full earn-out payment was distributed on March 4, 2016.
Flat
Tummy Tea is engaged in the business of developing, manufacturing, and selling herbal detox tea (“Flat Tummy Tea”).
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on November 1, 2015. The preliminary allocation of the purchase price to
the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
1,584,642
|
|
|
Other receivable
|
|
|
30,684
|
|
|
Inventory
|
|
|
134,212
|
|
|
Prepaid expenses
|
|
|
141,070
|
|
|
Fixed assets, net
|
|
|
5,698
|
|
|
Intangible assets,
Net
|
|
|
3,493
|
|
|
Blogger database
|
|
|
200,000
|
|
|
Customer database
|
|
|
500,000
|
|
|
Intellectual property
|
|
|
100,000
|
|
|
Non-compete provision
|
|
|
50,000
|
|
|
Goodwill
|
|
|
6,174,899
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(77,064
|
)
|
|
Accrued expenses
|
|
|
(56,224
|
)
|
|
Dividends payable
|
|
|
(1,177,152
|
)
|
|
Provision for income
tax
|
|
|
(518,558
|
)
|
|
|
|
$
|
7,095,700
|
|
During
second quarter of 2016, the Company consulted with a valuation professional to assist in determining the fair value of
the identifiable NomadChoice’s intangible assets. As a result of this work, the Company increased the amount allocated to
the Customer Database by $215,000, decreased the amount allocated to Intellectual Property by $100,000 and decreased the amount
allocated to the Blogger Database by $115,000. These adjustments had no effect on the income statement for the year ended December
31, 2015. The Company believes that these restated amounts properly state the fair value of the TPR Investments Pty Ltd. transaction.
The
final allocation of the purchase price to the assets acquired and liabilities assumed based on the independent valuation is as
follows:
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
1,584,642
|
|
|
Other receivable
|
|
|
30,684
|
|
|
Inventory
|
|
|
134,212
|
|
|
Prepaid expenses
|
|
|
141,070
|
|
|
Fixed assets, net
|
|
|
5,698
|
|
|
Intangible assets,
Net
|
|
|
3,493
|
|
|
Blogger database
|
|
|
85,000
|
|
|
Customer database
|
|
|
715,000
|
|
|
Intellectual property
|
|
|
-
|
|
|
Non-compete provision
|
|
|
50,000
|
|
|
Goodwill
|
|
|
6,174,899
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
(77,064
|
)
|
|
Accrued expenses
|
|
|
(56,224
|
)
|
|
Dividends payable
|
|
|
(1,177,152
|
)
|
|
Provision for income
tax
|
|
|
(518,558
|
)
|
|
|
|
$
|
7,095,700
|
|
The
Blogger Database, Customer Database, Intellectual property and non-compete provision will be amortized over its estimated useful
lives of 5 years. During each of the years ended December 31, 2017 and 2016, the Company charged to operations amortization expense
of $170,000.
The
purchase price allocated to the acquisition of the assets of NomadChoice is made up as follows:
|
|
|
Amount
|
|
|
Cash
|
|
$
|
2,848,800
|
|
|
Stock issued at closing
|
|
|
1,750,000
|
|
|
Earn-out payment
|
|
|
2,496,900
|
|
|
Total
|
|
$
|
7,095,700
|
|
Asset
Purchase Agreement with Perfekt Beauty Holdings LLC and CDG Holdings, LLC:
On
June 21, 2017, the Company entered into and simultaneously closed on an Asset Purchase Agreement with Perfekt Beauty Holdings
LLC and CDG Holdings, LLC, which owns 92.3% of the issued and outstanding equity interests of Perfekt Beauty. Perfekt Beauty is
engaged in the business of developing and selling skincare and cosmetics products under the brand Per-fekt.
The
acquisition was treated as an acquisition of assets
as the transaction involved the acquisition of a brand and a license agreement. The allocation of the
purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
|
Accounts
Receivable
|
|
$
|
52,439
|
|
|
Inventory
|
|
|
290,174
|
|
|
Intellectual
Property
|
|
|
10,000
|
|
|
Accounts
Payable
|
|
|
(111,217
|
)
|
|
Consideration
paid in 473,326 shares of common stock
|
|
$
|
241,396
|
|
As
additional consideration, the Company will pay quarterly royalties equal to 5% of net sales for 10 years following the closing
date. The purchase price was subject to adjustment as provided in the Purchase Agreement, based on the final amounts of
accounts payable, accounts receivable and new and unsold inventory.
Note
4 – Income Taxes
The
Company utilizes FASBASC740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
On
December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed
into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to
the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction
for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses
to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to
carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including
changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be
effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The Company has not recorded
the necessary provisional adjustments in the financial statements
in accordance with its current
understanding of the TCJA and guidance currently available as of this filing.
But is reviewing
the TCJA
’
s potential ramifications.
The
Company generated a deferred tax asset through net operating loss carry-forwards. Based upon Management’s evaluation, a
valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the benefit derived
from net operating loss carry-forwards.
Deferred
income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets
and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability
are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The
Company does not have any uncertain tax positions.
Income
tax expense for the years ended December 31, 2017 and 2016 was $289,811 and $944,358, respectively, due to Foreign Income
Tax relating to NomadChoice in Australia.
The
table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for
the years ended December 31, 2017 and 2016:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
U.S. Statutory Rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
U.S. effective rate in excess of AU/CA rate
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
U.S. valuation allowance
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
Foreign Tax -
Australia/Canada
|
|
|
40
|
%
|
|
|
638
|
%
|
|
Total provision
for income taxes
|
|
|
39
|
%
|
|
|
637
|
%
|
The
Company has deferred tax assets, which have been fully reserved, as follows as of December 31, 2017 and 2016:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Deferred
tax assets
|
|
$
|
7,174,556
|
|
|
$
|
12,950,124
|
|
|
Valuation
allowance for deferred tax assets
|
|
|
(7,174,556
|
)
|
|
|
(12,950,124
|
)
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Taxes
accrued and paid for the tax year December 31, 2016 are attributable to NomadChoice Pty, Ltd., the Company’s wholly-owned
subsidiary which is subject to income taxes in Australia, the jurisdiction in which it operates. Tax expense was
$289,811 and $944,358 for 2017 and 2016, respectively. The effective tax rate is attributable to the Company’s world wide
income/(loss) as it relates to the income tax expense due in Australia.
The
“TCJA” added a one-time taxation of offshore earnings for the period ending December 31, 2017 (IRC Sec. 965), regardless
of whether they are repatriated (“Deemed Repatriation”). The Company anticipates the one-time taxation of offshore
earnings relating to its foreign subsidiaries is applicable for the 2017 year end. The Company is reviewing its potential tax
liability at December 31, 2017, but has not fully completed the view. It is anticipated that such amount will not be a material
amount at December 31, 2017.
The
Company also has net operating loss carryforwards of approximately $33,634,744 and $32,720,733 (United States and Canada)
included in the deferred tax asset table above for 2017 and 2016, respectively, the majority attributable to the acquisition
of Breakthrough Products, Inc. However, due to limitations of carryover attributes and separate return limitation year rules,
it is unlikely the company will benefit from the NOL’s and thus Management has determined a 100% valuation reserved is required.
Further, the Company has not completed an evaluation of the NOL’s attributable to Breakthrough Products, Inc. at the date
of this report.
The
total deferred tax asset is calculated by multiplying a domestic (US) 21 percent marginal tax rate for 2017 and 36 percent
marginal tax rate for 2016 by the cumulative Net Operating Loss Carryforwards (“NOL”).The Company currently has net
operating loss carryforwards approximately aggregating $33,634,744 and $32,720,733 for 2017 and 2016, respectively, which
expire through 2035. The deferred tax asset related to the NOL carryforwards Management has determined based on all the available
information that a 100% Valuation reserve is required.
For
U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended
(the “Code”) Section 382, change of ownership rules. If the Company has had a change in ownership, the NOL’s
would be limited as to the amount that could be utilized each year, based on the Code.
Note
5 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Trade
accounts receivable
|
|
$
|
4,333,608
|
|
|
$
|
2,195,391
|
|
|
Less
allowances
|
|
|
-
|
|
|
|
-
|
|
|
Total
accounts receivable, net
|
|
$
|
4,333,608
|
|
|
$
|
2,195,391
|
|
During
each of the years ended December 31, 2017 and 2016, the Company charged $0 to bad debt expense.
Note
6 – Prepaid Expenses
At
December 31, 2017 and 2016, prepaid expenses consisted of the following:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Advances
for inventory
|
|
$
|
206,973
|
|
|
$
|
188,980
|
|
|
Components
|
|
|
104,668
|
|
|
|
-
|
|
|
Media
production
|
|
|
109,388
|
|
|
|
207,555
|
|
|
Insurance
|
|
|
41,548
|
|
|
|
70,392
|
|
|
Trade
shows
|
|
|
17,150
|
|
|
|
46,700
|
|
|
Deposits
|
|
|
44,841
|
|
|
|
6,228
|
|
|
Consultants
|
|
|
-
|
|
|
|
15,000
|
|
|
Rent
|
|
|
19,500
|
|
|
|
15,452
|
|
|
Promotion
- Bloggers
|
|
|
246,592
|
|
|
|
426,220
|
|
|
License
agreement
|
|
|
158,333
|
|
|
|
258,333
|
|
|
Software
subscriptions
|
|
|
20,513
|
|
|
|
88,782
|
|
|
Rebranding
|
|
|
32,841
|
|
|
|
-
|
|
|
Clinical
research
|
|
|
47,490
|
|
|
|
-
|
|
|
Advertising
|
|
|
2,500
|
|
|
|
-
|
|
|
Promotions
|
|
|
37,500
|
|
|
|
-
|
|
|
Miscellaneous
|
|
|
53,414
|
|
|
|
24,960
|
|
|
Total
|
|
$
|
1,143,251
|
|
|
$
|
1,348,602
|
|
Note
7 – Concentration of Credit Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At December 31, 2017 and 2016, the uninsured balance amounted to $1,557,373
and $2,038,985, respectively.
Accounts
receivable
As
of December 31, 2017 and 2016, three customers accounted for 88% and 91%, respectively, of the Company’s accounts
receivable.
Major
customers
For
the year ended December 31, 2017, two customers accounted for approximately 42% of the Company’s net revenue. For the year
ended December 31, 2016, three customers accounted for approximately 34% of the Company’s net revenue. Substantially all
of the Company’s business is with companies in the United States.
Major
suppliers
For
each of the years ended December 31, 2017 and 2016, our products were made by the following suppliers:
|
FOCUSfactor
|
Atrium
Innovations - Pittsburgh, PA
|
Vit-Best
Nutrition, Inc. - Tustin, CA
|
|
Flat
Tummy Tea
|
Caraway
Tea Company, LLC - Highland, NY
|
|
|
Neuragen
|
C-Care,
LLC - Linthicum Heights, MD
|
|
|
UrgentRx
|
Capstone
Nutrition - Ogden, UT
|
|
|
Hand
MD
|
HealthSpecialty
- Santa Fe Springs, CA
|
|
|
Sneaky
Vaunt
|
Dongguan
Jingrui - China
|
|
|
The
Queen Pegasus
|
Skin
Actives - Gilbert, AZ
|
|
|
The
Queen Pegasus
|
Ningbo
Beautiful Daily Cosmetics - Zhejiang, China
|
|
It
is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers
is not a significant concentration.
Note
8 – Inventory
Inventory
consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or market.
The
carrying value of inventory consisted of the following:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Finished
goods
|
|
$
|
1,507,344
|
|
|
$
|
474,420
|
|
|
Components
|
|
|
1,197,228
|
|
|
|
431,241
|
|
|
Inventory
in transit
|
|
|
45,188
|
|
|
|
104,500
|
|
|
Raw
Materials
|
|
|
92,616
|
|
|
|
92,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$
|
2,842,376
|
|
|
$
|
1,102,777
|
|
As
of January 22, 2015, inventory was pledged to Knight under the Loan Agreement (see note 12). As of December 31, 2017 and
2016, $45,188 and $104,500, respectively, of the Company’s inventory was in transit.
Note
9 – Fixed Assets and Intangible Assets
As
of December 31, 2017 and 2016, fixed assets and intangible assets consisted of the following:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
437,358
|
|
|
$
|
308,084
|
|
|
Less
accumulated depreciation
|
|
|
(144,153
|
)
|
|
|
(50,698
|
)
|
|
Fixed
assets, net
|
|
$
|
293,205
|
|
|
$
|
257,386
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 was $108,126 and $44,480, respectively.
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
FOCUSfactor
intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
|
Per-fekt
intellectual property
|
|
|
10,000
|
|
|
|
-
|
|
|
Intangible
assets subject to amortization
|
|
|
7,134,952
|
|
|
|
5,373,017
|
|
|
Less
accumulated amortization and impairment
|
|
|
(3,062,742
|
)
|
|
|
(1,677,583
|
)
|
|
Intangible
assets, net
|
|
$
|
5,532,210
|
|
|
$
|
5,145,434
|
|
Amortization
expense for the years ended December 31, 2017 and 2016 was $1,385,159 and $1,126,298, respectively. Impairment of intangible assets
for the year ended December 31, 2016 was $193,750. These intangible assets were acquired through the Asset Purchase Agreement
and the Stock Purchase Agreements disclosed in Note 3.
The
estimated aggregate amortization expense over each of the next five years is as follows:
|
2018
|
|
$
|
1,661,798
|
|
|
2019
|
|
|
1,661,640
|
|
|
2020
|
|
|
748,663
|
|
|
2021
|
|
|
8
|
|
Note
10 – Related Party Transactions
The
Company accrued and paid consulting fees of $41,250 per month through April 2017 and $57,917 per month through December 2017,
accounting fees of $12,500 per month and rent of $1,500 per month to a company owned by Mr. Jack Ross, Chief Executive Officer
of the Company. The Company expensed $796,336 and $481,215, respectively during 2017 and 2016 as consulting fees, and made
payments totaling $796,336 and $481,215 towards services to an entity owned and controlled by an officer and shareholder
of the Company for the year ended December 31, 2017 and 2016. The Company also paid out a bonus of $525,000 during 2017.
As of December 31, 2017 and 2016, the total outstanding balance was $0.
On
January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of the Focus Factor assets. At December 31, 2017 and 2016, the Company owed Knight $559,243 and $2,752,639, respectively,
on this loan, net of discount (see Note 12).
On
June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary
Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At December 31, 2017 and 2016, the Company owed
Knight $575,000 and $625,000 in relation to this agreement (see Note 12).
On
August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant
to which she will provide marketing and sales related service. The Company will pay Ms. Harshbarger $10,000 a month for one year
unless the Consulting Agreement is terminated earlier by either party. The Company decided to extend the contract on a month
to month basis. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $120,000 through payroll for each of the
years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016, the total outstanding balance was $0.
On
November 12, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At December 31, 2017 and 2016, the Company owed Knight $0
and $3,680,162, respectively, on this loan, net of discount (see Note 12).
On
December 22, 2016, we issued to Knight Therapeutics (Barbados) Inc., or Knight, 7,500,000 shares of our common stock in exchange
for the cancellation of warrants to purchase an aggregate of 8,132,002 shares of our common stock held by Knight, with per share
purchase prices of $0.34 and $0.49, and the cancellation of an option to purchase 1,000,000 shares of our common stock held by
Knight, with an exercise price of $0.25 per share. As additional consideration, Knight has agreed to purchase up to $2.0 million
worth of our common stock if and when we undertake a common stock equity financing, subject to certain terms and conditions.
On
December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada.
In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved
through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under
this agreement is $100,000 Canadian dollars. As of December 31, 2017, the total outstanding balance was $100,000 Canadian dollars.
On
August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working
capital loan. At December 31, 2017, the Company owed Knight $9,110,030 on this loan, net of debt issuance cost (see Note 10).
The
Company expensed royalty of $117,722 for the year ended December 31, 2017. At December 31, 2017 Sneaky Vaunt Corp., a subsidiary
of the Company, owed Knight Therapeutics $4,608 in connection with a royalty distribution agreement.
The
Company expensed commissions of $172,579 for the year ended December 31, 2017. At December 31, 2017 Sneaky Vaunt Corp., a subsidiary
of the Company, owed Founded Ventures, owned by a shareholder in the Company, $2,581 in connection with a commission agreement.
The Company paid a development fee for the brand, Sneaky Vaunt, in the amount of $761,935 for the year ended December 31, 2017.
The
Company expensed commissions of $13,952 for the year ended December 31, 2017. The Company paid a development fee for the brand,
The Queen Pegasus, in the amount of $1,000,000 for the year ended December 31, 2017. At December 31, 2017, The Queen Pegasus,
a subsidiary of the Company, owed Founded Ventures $1,462 in connection with a commission agreement.
The
Company expensed royalty of $24,227 for the year ended December 31, 2017. At December 31, 2017 The Queen Pegasus, a subsidiary
of the Company, owed Knight Therapeutics $10,274 in connection with a royalty distribution agreement.
The
Company paid $125,000 for the year ended December 31, 2017 to Hand MD, Corp, related to a royalty agreement. At December 31, 2017,
the Company owed Hand MD Corp. $250,000 in minimum future royalties.
The
Company expensed royalty of $380,166 and $543,881 for the years ended December 31, 2017 and 2016, respectively
.
At December 31, 2017 and 2016, NomadChoice Pty Ltd., a subsidiary of the Company owed Knight Therapeutics $39,682 and $87,678,
respectively, in connection with a royalty distribution agreement (see Note 3).
Note
11 – Accounts Payable and Accrued Liabilities
As
of December 31, 2017 and 2016, accounts payable and accrued liabilities consisted of the following:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Accrued
payroll
|
|
$
|
296,491
|
|
|
$
|
275,913
|
|
|
Accrued
legal fees
|
|
|
96,017
|
|
|
|
37,546
|
|
|
Commissions
|
|
|
178,286
|
|
|
|
-
|
|
|
Manufacturers
|
|
|
2,147,751
|
|
|
|
1,459,460
|
|
|
Promotions
|
|
|
897,925
|
|
|
|
1,244,480
|
|
|
Returns
allowance
|
|
|
-
|
|
|
|
860,126
|
|
|
Professional
Fees
|
|
|
45,921
|
|
|
|
-
|
|
|
Accounting
Fees
|
|
|
19,681
|
|
|
|
-
|
|
|
Rent
|
|
|
19,500
|
|
|
|
-
|
|
|
Customers
|
|
|
106,395
|
|
|
|
401,594
|
|
|
Interest
|
|
|
147,000
|
|
|
|
31,079
|
|
|
Royalties,
related party
|
|
|
138,143
|
|
|
|
87,677
|
|
|
Warehousing
|
|
|
10,388
|
|
|
|
19,080
|
|
|
Others
|
|
|
225,050
|
|
|
|
141,964
|
|
|
Total
|
|
$
|
4,328,548
|
|
|
$
|
4,558,919
|
|
Note
12 – Notes Payable
The
Company’s loans payable at December 31, 2017 and 2016 are as follows:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Loans
payable
|
|
$
|
10,344,739
|
|
|
$
|
7,634,697
|
|
|
Unamortized
debt discount
|
|
|
-
|
|
|
|
-
|
|
|
Unamortized
debt issuance cost
|
|
|
(393,227
|
)
|
|
|
(163,549
|
)
|
|
Total
|
|
|
9,951,512
|
|
|
|
7,471,148
|
|
|
Less:
Current portion
|
|
|
(2,487,233
|
)
|
|
|
(6,640,903
|
)
|
|
Long-term
portion
|
|
$
|
7,464,279
|
|
|
$
|
830,245
|
|
$6,000,000
January 22, 2015 Loan:
On
January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics
(Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”),
and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business
(defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000
of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that
upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will
drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31
in each year, beginning on March 31, 2015.
All
outstanding principal and accrued and unpaid interest is due on the earliest to occur of either January 20, 2017 (the “Maturity
Date”), or the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.
The Company may extend the Maturity Date for two successive additional 12-month periods if at March 31, 2016 and March 31, 2017,
respectively, the Company’s revenues exceed $13.0 million and its EBITDA exceeds $2.0 million for the respective 12-month
period then ending. These covenants were achieved, therefore the Company chose to extend the loan for the first 12-month period.
Principal payments under the Loan Agreement commenced on June 30, 2015 and continue quarterly as set forth on the Repayment Schedule
to the Loan Agreement.
Subject
to certain restrictions, the Company may prepay the outstanding principal of the Loan (in whole but not in part) at any time if
the Company pays a concurrent prepayment fee equal to the greater of (i) the total unpaid annual interest that would have been
payable during the year in which the prepayment is made if the prepayment is made prior to the first anniversary of the closing,
and (ii) $300,000. The Company’s obligations under the Loan Agreement are secured by a first priority security interest
in all present and future assets of the Company. The Company also agreed to not pledge or otherwise encumber its intellectual
property assets, subject to certain customary exceptions.
The
Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants
to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for
businesses substantially similar or complementary to the Company’s business and the aggregate consideration to be paid does
not exceed $100,000) or make capital expenditures in excess of $100,000 over the Company’s annual business plan in any year.
The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control
and material adverse effect default. Upon the occurrence of an event of default and during the continuation thereof, the principal
amount of the Loan will bear a default interest rate of an additional 5%.
In
connection with the Loan Agreement, the Company issued to Knight a warrant that entitled Knight to purchase 4,595,187 shares of
common stock of the Company (“Common Stock”) on or prior to close of business on January 30, 2015 (the “ST Warrant”).
The aggregate exercise price of the Common Stock under the ST Warrant is $1.00. Knight exercised the ST Warrant on January 22,
2015. Also in connection with the Loan Agreement, the Company issued to Knight a warrant to purchase 3,584,759 shares of Common
Stock on or prior to the close of business of January 22, 2025 (the “LT Warrant”). The exercise price per share of
the Common Stock under the LT Warrant is $0.34. The LT Warrant provides for cashless exercise. The LT Warrant also provides that
in the event the closing price of the Common Stock remains above $1.00 for six consecutive months, Knight will forfeit the difference
between the number of shares acquired under the LT Warrant prior to 90 days after such six-month period, and 25% of the shares
purchasable under the LT Warrant.
The
beneficial conversion feature of the warrants issued to the noteholders amounted to $1,952,953 (ST warrants) and $1,462,560 (LT
warrants), respectively, and was recorded as debt discount of the corresponding debt.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
The
Company also recorded deferred financing costs of $289,045 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $56,605 and $92,976 during the years ended December 31, 2017 and 2016, respectively. Unamortized
debt issuance cost as of December 31, 2017 amounted to $3,257.
The
Company recognized and paid interest expense of $293,238 and $625,359 during the years ended December 31, 2017 and 2016, respectively.
Accrued interest expense was $0 as of both December 31, 2017 and 2016. Loan payable balance was $562,500 and $2,812,500 as of
December 31, 2017 and 2016, respectively.
On
December 22, 2016, we entered into Subscription Agreement with Knight Therapeutics (Barbados) Inc., or Knight, and issued 7,500,000
shares of our common stock in exchange for the cancellation of warrants to purchase an aggregate of 8,132,002 shares of our common
stock held by Knight, with per share purchase prices of $0.34 and $0.49, and the cancellation of an option to purchase 1,000,000
shares of our common stock held by Knight, with an exercise price of $0.25 per share. As additional consideration, Knight has
agreed to purchase up to $2.0 million worth of our common stock if and when we undertake a common stock equity financing, subject
to certain terms and conditions.
$1,500,000
January 22, 2015 Loan:
On
January 22, 2015, the Company issued a 0% promissory note in a principal amount of $1,500,000 in connection with an Asset Purchase
Agreement (see note 1). The note has a maturity date of January 20, 2017, with $750,000 to be paid on or before January 20, 2016
and an additional $750,000 to be paid on or before January 20, 2017. Loan payable balance was $0 and $750,000 as of December 31,
2017 and 2016, respectively. The loan was paid in full in January 2017.
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company, through its wholly owned subsidiary, Neuragen Corp. (“Neuragen”), issued a 0% promissory
note in a principal amount of $950,000 in connection with an Asset Purchase Agreement (see note 1). The note requires $250,000
to be paid on or before June 30, 2016, and $700,000 to be paid in quarterly installments (beginning with the quarter ending September
30, 2015) equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S. net sales of Neuragen for 60 months thereafter.
The payment of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”)
pursuant to the Security Agreement, which will be released upon receipt of total payments of $1.2 million.
The
Company also recorded deferred financing costs of $10,486 with respect to the above agreement. The Company recognized amortization
of deferred financing costs of $2,600 and $5,243 during the years ended December 31, 2017 and 2016, respectively. Unamortized
debt issuance cost as of December 31, 2017 amounted to $0. The Company recorded present value of future payments of $282,240 and
$290,947 as of December 31, 2017 and 2016, respectively. The Company recorded interest expense of $41,292 and $59,358 for the
year ended December 31, 2017 and 2016, respectively. The Company made payments of $50,000 during 2017 and $300,000 during 2016.
$5,500,000
November 12, 2015 Loan:
On
November 12, 2015, we entered into a First Amendment to Loan Agreement (“First Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $5.5 million, and which amount was borrowed at closing (the “Financing”)
for the purpose of acquiring Breakthrough Products, Inc. and NomadChoice Pty Limited through Stock Purchase Agreements. At closing,
we paid Knight an origination fee of $110,000 and a work fee of $55,000 and also paid $24,000 of Knight’s expenses associated
with the Loan. The Loan bears interest at a rate of 15% per year. The interest rate will decrease to 13% if we meet certain equity-fundraising
targets. The New Loan Agreement matured on November 11, 2017 and was fully paid.
In
connection with the New Loan Agreement, we issued Knight a warrant that entitles Knight to purchase 5,550,625 shares of our common
stock (“Knight Warrant Shares”) representing approximately 6.5% of our fully diluted capital, which Knight exercised
in full on November 12, 2015. Knight also received a 10-year warrant entitling Knight to purchase up to 4,547,243 shares of our
common stock at $0.49 per share (“Knight Warrants”).
The
beneficial conversion feature of the warrants issued to the noteholders amounted to $2,553,287 (5,550,625 warrants) and $2,067,258
(4,547,243 warrants), respectively, and was recorded as debt discount of the corresponding debt. For derivative liability calculation
on 4,547,243 warrants, refer to Note 17.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
The
Company also recorded deferred financing costs of $233,847 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $101,088 and $117,083 during the years ended December 31, 2017 and 2016, respectively. Unamortized
debt issuance cost as of December 31, 2017 amounted to $0.
The
Company recognized interest expense of $252,515 and $767,904 during the years ended December 31, 2017 and 2016, respectively.
Accrued interest expense was $0 and $31,079 as of December 31, 2017 and 2016, respectively. The principal balance outstanding
at December 31, 2017 and 2016 was $0 and $3,781,250, respectively.
On
December 22, 2016, we entered into Subscription Agreement with Knight Therapeutics (Barbados) Inc., or Knight, and issued 7,500,000
shares of our common stock in exchange for the cancellation of warrants to purchase an aggregate of 8,132,002 shares of our common
stock held by Knight, with per share purchase prices of $0.34 and $0.49, and the cancellation of an option to purchase 1,000,000
shares of our common stock held by Knight, with an exercise price of $0.25 per share. As additional consideration, Knight has
agreed to purchase up to $2.0 million worth of our common stock if and when we undertake a common stock equity financing, subject
to certain terms and conditions.
$10,000,000
August 9, 2017 Loan:
On
August 9, 2017, we entered into a Second Amendment to Loan Agreement (“Second Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $10 million, and an ongoing credit facility of up to $20 million, and which amount
was borrowed at closing (the “Financing”) for working capital purposes. At closing, we paid Knight an origination
fee of $200,000 and a work fee of $100,000 and also paid $100,000 of Knight’s expenses associated with the Loan. The Loan
bears interest at 10.5% per annum. The new Loan Agreement matures on August 8, 2020.
The
Company also recorded deferred financing costs of $452,869 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $62,898 during the year ended December 31, 2017. Unamortized debt issuance cost as of December
31, 2017 amounted to $389,970.
The
Company recognized interest expense of $412,417 during the year ended December 31, 2017. Accrued interest was $147,000 as of December
31, 2017. Loan balance at December 31, 2017 was $9,500,000.
Note
13 – Stockholders’ Equity
As
of December 31, 2015, the Company committed to issue common stock valued at $68,000 for services rendered. During 2016, 213,742
shares of the Company’s common stock were issued valued at $0.32 per share.
During
the year ended December 31, 2016, the Company issued 71,248 shares of its common stock valued at $0.70 per share for services
rendered.
During
the year ended December 31, 2016, the Company cancelled 713,767 shares of its common stock valued at $125,000 in conjunction with
an agreement with a former shareholder. The Company committed to issue 125,000 shares to former shareholders valued at $56,250
recorded as settlement expense during the year. These shares were issued during 2017.
During
the year ended December 31, 2016, the Company issued 7,500,000 shares of its common stock valued at $1,456,492 in conjunction
with an agreement to cancel all outstanding stock warrants and options issued along with the loans payable to the lender
.
During
the year ended December 31, 2017, the Company issued 473,326 shares of its common stock valued at $0.51 per share in accordance
with an asset purchase agreement entered into with Perfekt Beauty Holdings, LLC and CDG Holdings, LLC, in exchange for assets
and liabilities related to the Per-fekt brand.
During
the year ended December 31, 2017, the Company sold 400,000 shares of its common stock valued at $220,000 to an
employee of the Company.
During
the year ended December 31, 2017, the Company issued 100,000 shares of its common stock valued at $55,000
to an employee of the Company.
As
of December 31, 2017 and 2016, there were 89,862,683 and 88,764,357 shares of the Company’s common stock issued and outstanding,
respectively.
Note
14 – Commitments and Contingencies
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Employee
Commitments
The
Company and Mr. Kadanoff entered into an employment agreement on October 10, 2017 with an initial term of 3 years. In exchange
for his service as Chief Financial Officer, Mr. Kadanoff will receive an annual base salary of $450,000. He will receive a signing
bonus consisting of: (i) 100,000 shares of the Company’s common stock, and (ii) a cash payment equal to the value of 100,000
shares of the Company’s common stock based on a price of $0.55 per share. He will receive an annual bonus for calendar year
2017 of $37,500. Beginning with calendar year 2018, Mr. Kadanoff will be eligible for an annual target bonus of up to half his
base salary. The target bonus will be determined at the discretion of our Board or compensation committee based upon the achievement
of financial and other performance-related goals and may be paid in cash or shares of the Company’s common stock.
In
connection with his employment, Mr. Kadanoff has committed to purchasing 400,000 shares of our common stock from the Company for
a price of $0.55 per share. The Company granted Mr. Kadanoff an option to purchase 1,500,000 shares of the Company’s common
stock at an exercise price of $0.55 (the “Initial Option”). The Initial Option will vest in three (3) equal annual
installments on the first three anniversaries of Mr. Kadanoff’s Start Date with the Company, provided that Mr. Kadanoff
remains employed by the Company on each such date. The Initial Option will expire on the tenth anniversary of the grant date.
Subject to the approval by the Board, during each calendar year of Mr. Kadanoff’s employment with the Company beginning
with 2018, the Company will grant to him an option to purchase 500,000 shares of the Company’s common stock (such options
collectively the “Additional Options”). The exercise price of each Additional Option will be the Fair Market Value
of the common stock on the date each such Additional Option is granted. Each Additional Option will expire on the tenth anniversary
of the date of grant of such Additional Option. The Additional Options will vest in three (3) equal annual installments on the
first three anniversaries of the date of grant of such Additional Option, provided that Mr. Kadanoff remains employed by the Company
on each such date. Upon the occurrence of a Change in Control , the vesting of stock options granted to Mr. Kadanoff will be accelerated
subject to his continued service to the Company as of such date and provided further that Mr. Kadanoff’s stock options will
be treated no less favorably than those of any other senior executive or Chairman of the Company.
The
Company and Mr. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with
an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000.
He will receive a cash signing bonus of $37,500, to be paid on January 1, 2018, and an additional cash signing bonus of $37,500,
to be paid on July 1, 2018, provided that he is employed by the Company through such dates. Mr. McCullough will be eligible for
an annual bonus of up to twenty-five percent (25%) of his base salary. The annual bonus will be determined at the discretion of
our Board or compensation committee based upon the achievement of financial goals established by the Company’s Chief Executive
Officer. Mr. McCullough will also be eligible for additional bonus compensation based on the Company’s achievement of certain
annual earnings and retail sales goals established each year by the Company’s Chief Executive Officer. Subject to the Company’s
achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions by the Company, Mr.
McCullough will be eligible to receive five percent (5%) of all retail sales by the Company in excess of the annual retail sales
goal set by the Chief Executive Officer.
The
Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, subject to the approval
of the Company’s Board of Directors (the “Option Grant”). The Option Grant will vest in three (3) equal annual
installments on the first three anniversaries of Mr. McCullough’s start date with the Company, provided that Mr. McCullough
remains employed by the Company on each such date. The Option Grant will be granted under the Company’s 2014 Stock Incentive
Plan pursuant to a stock grant agreement between the Company and Mr. McCullough.
Operating
leases
In
April 2014, a subsidiary entered into an extension of a non-cancellable operating lease for office space that expires on March
31, 2017. Rent expense under this lease for the period from acquisition until December 31, 2015 was $8,923 per month less a $3,010
per month sublease through March 2017. This lease has expired.
On
December 8, 2014, a subsidiary entered into a non-cancellable 36 month phone lease with an estimated cost of $894 a month. This
lease expired in December 2017.
In
December 2015, a subsidiary entered into a non-cancellable operating lease for office space through November 2016. This lease
was extended until April 2017 and expired.
In
December 2015, the Company entered into a non-cancellable operating lease for office space through December 2016. Rental payments
under this lease were $5,500 per month. This lease has expired.
On
August 16, 2017, the Company entered into a sublease for office space, effective October 1, 2017 through May 2021. Rent expense
under this lease will be $19,500 per month, and increasing annually on June 1.
The
following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2017:
|
Year
ending December 31:
|
|
|
|
|
2018
|
|
$
|
238,095
|
|
|
2019
|
|
|
245,234
|
|
|
2020
|
|
|
252,591
|
|
|
2021
|
|
|
106,540
|
|
|
2022
|
|
|
-
|
|
|
Total
|
|
$
|
842,460
|
|
Note
15 – Stock Options
On
July 30, 2014, the Company’s board of directors approved the Company’s 2014 Equity Incentive Plan and the reservation
of 15,525,000 shares of common stock for issuance under such plan. Such plan was approved by the Company’s shareholders
and became effective on August 5, 2015.
On
April 2, 2014, the Company granted 1,000,000 options with an exercise price of $0.25 per share to the Company owned by Mr. Jack
Ross, Chief Executive Officer of the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.25 per share to two Board Members of
the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.65 per share to two employees of the
Company.
On
February 18, 2016, the Company granted 300,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
April 18, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
July 4, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company. During
2017 333,333 unvested options were cancelled due to termination of employee.
On
October 10, 2017, the Company granted 1,000,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
October 16, 2017, the Company granted 1,500,000 options with an exercise price of $0.55 per share to an employee of the Company.
On
October 18, 2017, the Company granted 200,000 options with an exercise price of $0.70 per share to an employee of the Company.
The
following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common
stock issued to employees and consultants under a stock option plan at December 31, 2017:
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Exercise
Price ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
$
|
0.25
- 0.70
|
|
|
|
8,666,667
|
|
|
|
7.21
|
|
|
$
|
0.51
|
|
|
|
5,941,667
|
|
|
$
|
0.46
|
|
The
stock option activity for the year ended December 31, 2017 is as follows:
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
at December 31, 2015
|
|
|
5,000,000
|
|
|
$
|
0.41
|
|
|
Granted
|
|
|
2,300,000
|
|
|
|
0.50
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
or canceled
|
|
|
(1,000,000
|
)
|
|
|
(0.25
|
)
|
|
Outstanding
at December 31, 2016
|
|
|
6,300,000
|
|
|
$
|
0.47
|
|
|
Granted
|
|
|
2,700,000
|
|
|
|
0.62
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
or canceled
|
|
|
(333,333
|
)
|
|
|
(0.70
|
)
|
|
Outstanding
at December 31, 2017
|
|
|
8,666,667
|
|
|
$
|
0.51
|
|
Stock-based
compensation expense related to vested options was $1,458,850 and $2,200,160 during the years ended December 31, 2017 and 2016,
respectively. The Company determined the value of share-based compensation for options vesting during the year ended December
31, 2016 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair
value of Company’s common stock of $0.40-0.61, risk-free interest rate of 0.90-1.24%, volatility of 135-160%, expected lives
of 3-6 years, and dividend yield of 0%. The Company determined the value of share-based compensation for options vesting during
the year ended December 31, 2017 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions:
estimated fair value of Company’s common stock of $0.48-0.50, risk-free interest rate of 1.95-1.99%, volatility of 116-117%,
expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of December 31, 2017, as disclosed in the above
table, have an intrinsic value of $711,900.
Note
16 – Stock Warrants
The
following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock
at December 31, 2017:
|
|
|
|
Warrants
Outstanding
|
|
|
|
|
|
|
|
Warrants
Exercisable
|
|
|
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price ($)
|
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price ($)
|
|
|
|
5.00
|
|
|
1,000,000
|
|
|
0.96
|
|
|
|
5.00
|
|
|
1,000,000
|
|
|
5.00
|
|
The
warrant activity for the year ended December 31, 2017 is as follows:
|
|
|
Warrants
Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Outstanding
at December 31, 2015
|
|
|
9,132,002
|
|
|
$
|
0.92
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
or canceled
|
|
|
(8,132,002
|
)
|
|
|
(0.42
|
)
|
|
Outstanding
at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
5
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
or canceled
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2017
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Stock
warrants outstanding as of December 31, 2017, as disclosed in the above table, have an intrinsic value of $0.
Note
17 – Derivatives
The
Company has incurred a liability for the estimated fair value of a derivative warrant instrument. The estimated fair value of
the derivative warrant instruments has been calculated using the Black-Scholes fair value option-pricing model with key input
variables provided by management, as of the issue date, with the valuation offset against additional paid in capital, and at each
reporting date, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
The
Company identified embedded derivatives related to the warrants issued along with loan payable entered into in November 2015.
These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments
requires that the Company record the fair value of the derivatives as of the inception date of the warrants and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the warrants, the Company determined a fair value of
$2,067,258 of the embedded derivative. The fair value of the embedded derivative was determined using the Black-Scholes Model
based on the following assumptions:
|
|
|
November
12, 2015
|
|
|
Risk-free
interest rate
|
|
|
2.32
|
%
|
|
Expected
remaining term
|
|
|
10
Years
|
|
|
Expected
volatility
|
|
|
157.56
|
%
|
|
Dividend
yield
|
|
|
0
|
%
|
The
initial fair values of the embedded derivative of $2,067,258 was allocated as a debt discount $2,067,258.
During
the year ended December 31, 2016, the decrease in the fair value of the warrant derivative liability of $1,380,600 was recorded
as a gain on change in fair value of derivative liability.
During
December 2016, the Company cancelled these warrants and issued 7,500,000 shares of common stock and accordingly warrant derivative
liability was extinguished.
Fair
value at December 23, 2016 when the warrants were cancelled was estimated to be $1,715,579, based on the following assumptions:
|
|
|
December
23, 2016
|
|
|
Risk-free
interest rate
|
|
|
2.55
|
%
|
|
Expected
remaining term
|
|
|
8.92
Years
|
|
|
Expected
volatility
|
|
|
143.15
|
%
|
|
Dividend
yield
|
|
|
0
|
%
|
The
following table summarizes the derivative liabilities included in the balance sheet at December 31, 2016:
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
Balance
- December 31, 2015
|
|
$
|
3,096,179
|
|
|
Extinguishment
of derivatives liabilities from cancellation of warrants
|
|
|
(1,715,579
|
)
|
|
Gain
on change in fair value of the derivative liabilities
|
|
|
(1,380,600
|
)
|
|
Balance
– December 31, 2016
|
|
$
|
-
|
|
Note
18 – Segments
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregated basis.
Net
sales attributed to customers in the United States and foreign countries for the years ended December 31, 2017 and 2016 were as
follows:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
United
States
|
|
$
|
32,922,730
|
|
|
$
|
32,010,018
|
|
|
Foreign
countries
|
|
|
2,673,305
|
|
|
|
2,830,376
|
|
|
|
|
$
|
35,596,035
|
|
|
$
|
34,840,394
|
|
The
Company’s net sales by product group for the years ended December 31, 2017 and 2016 were as follows:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
Nutraceuticals
|
|
$
|
29,903,714
|
|
|
$
|
33,877,529
|
|
|
Over
the Counter (OTC)
|
|
|
1,203,034
|
|
|
|
907,401
|
|
|
Consumer
Goods
|
|
|
3,614,090
|
|
|
|
-
|
|
|
Cosmeceuticals
|
|
|
875,197
|
|
|
|
55,464
|
|
|
|
|
$
|
35,596,035
|
|
|
$
|
34,840,394
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of December 31, 2017 and 2016 were as follows:
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
United
States
|
|
$
|
13,613,043
|
|
|
$
|
13,174,461
|
|
|
Foreign
countries
|
|
|
5,612
|
|
|
|
21,599
|
|
|
|
|
$
|
13,618,655
|
|
|
$
|
13,196,060
|
|
Note
19 – Subsequent Events
During
2018, the Company paid its final payment of $562,500 on the $6,000,000 loan relating to the purchase of the Focus Factor
brand. The Company also made an additional $500,000 payment on Loan 3.